Report Foreign Pension on IRS Form 3520-A?

Foreign Pension Form 3520-A Reporting: When it comes to IRS and International reporting of foreign accounts, assets, and investments, there is a sliding scale of complexity. For example, the FBAR is not a very difficult form to complete (even though the penalties can be bad). On the other end of the spectrum are the other more complicated reporting forms, such as form 5471 inform 3520-A.

These latter two forms refer to the reporting of foreign corporations and foreign trusts with the US owner.

The topic of today’s discussion is Form 3520-A ,and specifically how the requirements for reporting foreign pensions, such as the Australian Superannuation, Singaporean CPF, and Hong Kong MPF.

Since the form 3520-A can be a relatively time-intensive undertaking, the threshold question of whether a foreign pension is required to be reported on form 3520-A is an important one.

Form 3520-A & Foreign Pensions

The Form 3520-A is used to report certain foreign trusts to the IRS.

As provided by the Internal Revenue Service:

“The purpose of form 3520-A is it for the annual reporting of a foreign trust with at least one US owner.“

Looking at most foreign pensions from abroad, technically the beneficiary/employee would not be considered an owner of the trust, per se.

In other words, on the most basic level, there is the owner of the trust who is the employer, the administrator of the trust who is the trustee, and the beneficiary of the trust – which are the employees.

The Basics of Which Foreign Trusts are Reportable

Here are some of the basics of the Form 3520-A Trusts:

Who is a Grantor?

“A grantor includes any person who creates a trust or directly or indirectly makes a gratuitous transfer of cash or other property to a trust. A grantor includes any person treated as the owner of any part of a foreign trust’s assets under sections 671 through 679, excluding section 678.”

What is a Grantor Trust?

“A grantor trust is any trust to the extent that the assets of the trust are treated as owned by a person other than the trust. See the grantor trust rules in sections 671 through 679. A part of the trust may be treated as a grantor trust to the extent that only a portion of the trust assets are owned by a person other than the trust.”

With an employment trust, the employee is not the owner of trust. Rather, the employee may have a beneficial interest in the trust, along with all the other employees, for their respective share — but the employee is not an actual owner of the trust (subject to exception).

RRSPs and the Form 3520-A

The RRSPis a Registered Retirement Savings Plan in Canada. There are many US persons who have worked or otherwise resided in Canada and have an RRSP account.

While the IRS has not ruled on the reporting requirement for all foreign-type investments, the IRS has provided an exception for RRSP (Canada), so that it is not required to be included on the Form 3520-A.

Even if the RRSP would be classified a foreign pension, within the instructions of the form 3520-A is an exception to the reporting requirement for RRSPs:

“Custodians of Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs) are not required to file Form 3520-A with respect to a U.S. citizen or resident alien who holds an interest in an RRSP or RRIF.

In addition, custodians of any other Canadian retirement plan within the meaning of section 3 of Rev. Proc. 2014-55 are not required to file Form 3520-A for a U.S. citizen or resident alien owner or beneficiary. See Rev. Proc. 2014-55, 2014-44 I.R.B. 753“

What Does Rev Proc 2014-55 provide?

“Reporting Rules for a Beneficiary or Annuitant of a Canadian Retirement Plan. Subject to any future guidance that may be issued by the Treasury Department and the IRS, beneficiaries (regardless of whether they are “eligible individuals” within the meaning of section 4.01 of this revenue procedure) and annuitants are not required to report contributions to, distributions from, and ownership of a Canadian retirement plan under the simplified reporting regime established by Notice 2003–75 (Form 8891) or pursuant to the reporting obligations imposed by section 6048 (Form 3520).

In addition, custodians are not required to file Form 3520–A with respect to a Canadian retirement plan. This revenue procedure does not, however, affect any reporting obligations that a beneficiary or annuitant of a Canadian retirement plan may have under section 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. § 5314 and the regulations thereunder.”

What does this Mean?

Basically, this rev. proc. provides that even if the RRSP is required on the FBAR and Form 8938, it is not required to be reported on Form 3520-A.

Canadian Retirement vs. Other Countries

There is no specific reason why the US would choose Canada for the exception, any different from the other countries that the IRS has entered into a DTA with. Presumably it is because the U.S. and Canada are so close in proximity, making the RRSP one of the more common types of plans that a US person would have.

But, in using the same line of thinking, it would also presume that similarly situated foreign pension plans in other treaty countries may also be exempt.

In fact, the Internal Revenue Service recently issued a new Revenue Procedure 2020-17, which specifically exempts several foreign retirement trusts from reporting.

Rev Proc 2020-17 Further Limits 3520-A Reporting

The concept behind the Revenue Procedure is that most of these trusts already reported as accounts on the FBAR and form 8938 – so why make taxpayer file another form just to duplicate that same reporting.

Unfortunately, some of the language in this Rev. Proc. is a bit ambiguous and convoluted, which makes can make it difficult to determine exactly which foreign pensions will qualify for the exception.

Not Qualified under Rev Proc 2020-17?

The other issue with the new Revenue Procedure is the converse of not having to report, which would be that unless the specific retirement plan is specifically exempted from reporting (such as the RRSP), and/or qualifies under Revenue Procedure 2020-17, the presumption may be that it would have to file a form 3520-A.

This may be a bit of a harsh reading of the instructions and the Revenue Procedure, and at the end of day it will boil down to each taxpayer’s risk tolerance.

For some taxpayers there’s peace of mind in simply filing the form each year and do not worry about it, and for other taxpayers it’s not worth the time cost to continually having to file the form 3520-A each year.

Self-Managed Funds

In some countries such as Australia, there are self managed versions a foreign pension such as the self managed superannuation fund.

When a superannuation is self-managed, the analysis will become more complex.

On the one hand, a self-employed U.S. person with an ownership in the company that established the SMSF may have ownership sufficient to meet the 3520-A requirements. On the other hand, just because a person owns a foreign company separate from themselves, and that company has its own SMSF, does not mean the US person directly owns any of the trust. By definition, the employee would be the beneficiary, and the corporation/entity would be Trustor.

*Issues such as the Controlled Foreign Corporationrules and/or self-employment without a structure (sole proprietor) can further complicate the analysis.

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